>ORIENTAL BANK OF COMMERCE (ICICI SECURITIES)

Weak at the core

Though Oriental Bank of Commerce (OBC) saw better-than-expected net profit growth of 16.7% YoY, results were qualitatively weak. While NII growth stood at 9% (higher than our estimates), NIMs remained low at 1.83% owing to low CASA. Other income was buoyed by trading gains of Rs2.36bn (compared with Rs610mn in Q1FY09). While GNPAs increased 8bps QoQ, restructured assets saw sharp surge to Rs55bn in Q1FY10 (7.7% of gross advances) vis-à-vis Rs26bn in Q4FY09 (3.8% of gross advances). We trim our FY10E & FY11E earnings estimates 3.9% & 2.4% respectively, to reflect slower NII progression and higher loan-loss provisions. We lower our target price to Rs210/share (based on FY11E BV of 0.65x). At current market price, the stock trades at FY11E P/E & P/BV of 4x & 0.5x respectively. Maintain BUY. Inability to increase CASA and sharp rise in NPLs remain key risks.

■ Business growth healthy; NIMs remain low. Business growth was healthy at 25.1% owing to 27.7% YoY advances growth and 23.3% YoY rise in deposits. Both priority sector and retail advances increased 20% YoY each, with 19% YoY growth in housing loans. CASA continues to languish at 23% and, coupled with recent PLR cuts, pressured margins to 1.83%; NII growth stood at 9% YoY in the quarter.

■ Trading gains buoy other income; ad hoc provisions push-up costs. Noninterest income growth of 88.4% YoY was driven by trading gains of Rs2.36bn (compared with Rs610mn in Q1FY09). Other income (ex treasury) saw muted rise of 5.8% YoY. Operating costs increased 20.3% YoY, with staff costs up 23.3% YoY on Rs350mn provision for wage revision in the quarter. Cost-to-income stood at 41%.

■ Restructured assets see significant rise. Deterioration in asset quality seemed manageable, with GNPAs & NNPAs increasing 8bps QoQ & 6bps QoQ to 1.61% & 0.71% respectively. However, key surprise was sharp rise in restructured assets to Rs55bn (7.7% of gross advances) from Rs26bn in Q4FY09 (3.8% of gross advances). Provisions were down 27% YoY to Rs1.5bn. The bank booked losses of Rs1.37bn owing to transfer of securities to HTM and wrote-back provisions for investment depreciation of Rs1.22bn in Q1FY10. Provisions for NPAs & standard
assets stood at ~Rs1bn and for restructured advances at Rs225mn.

■ Maintain BUY on inexpensive valuations. Despite higher-than-estimated net profit growth of 16.7% and operating profits growing a healthy 46.1%, OBC’s performance was qualitatively weak. We trim FY10E & FY11E estimates 3.9% & 2.4% to reflect slower NII progression and increased loan-loss provisions. We lower our target price to Rs210 (on FY11E BV of 0.65x). But at the current market price, the stock trades at FY11E P/E & P/BV of 4x & 0.5x respectively (lowest multiples versus PSU peers). Maintain BUY. Hardening of interest rates and sharp rise in NPLs remain key risks.

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